Investing for Income – Is it time to think differently?

Matt Richardson

With the RBA likely to announce further reductions in official interest rates during the year, this will be yet another blow to fixed interest investors who have faced a number of years of declining interest returns. If and when the RBA announces this interest rate reduction, you can guarantee the big banks will drop their Term Deposit rates first, before meeting to decide whether borrowing rates will also come down.

Five years ago, investors could generate up to 8.0% per year on a 5 year term deposit. Along with that the first $1,000,000 you invested in that bank was guaranteed by the Federal Government. This guarantee has now reduced to $250,000 and the going 5 year rate is now around 3.75 – 4.0%.

In other words its getting tougher and tougher to generate income to live in. Many investors have been forced to dip into their investment capital for their living requirements.

Understanding Risk!

Retirees are often worried about the volatility risk of the sharemarket as the reason for not investing in shares. However, retirees also need to understand the equally large risk that inflation presents. Falling interest rates on deposits results in lower income for investors to live on. The double whammy comes with inflation where your initial investment continues to buy less and less every year.

Many self-funded retirees are paying a rate of income tax close to 0% due to their low incomes as well as the concessional tax treatment allowed to those over 65. The advantage this presents is any franking credits an investor earns on fully franked dividends are refunded to the investor at year end. Fully franked dividends from companies like Telstra and the big four banks will generate after-tax yields of between 7% and 8.5% per year. Apart from one year after the GFC these dividends have continued to rise slowly over time, in many cases staying well ahead of the rate of inflation.

Now we are not advocating that all investors redeem their Term Deposits to buy shares in these five listed Companies and all investing problems will be solved. Far from it in fact.

We are just trying to bring to everyone’s attention that there are risks not only investing in the sharemarket, but also investing in capital guaranteed Term Deposits. There may be a solution for investors by spreading their investments across both of these areas.

Our financial planning partners at Prime can help investors with these solutions. Among these solutions, Prime has their Australian Equities Income Portfolio which has outperformed the ASX300 Accumulation Index over the last 2 years by over 3% and has been ranked 19th out of 130 similar funds by Zenith Research. Having a balanced portfolio such as this can take a lot of the guess work and decision making out of what shares to invest in.

If you are finding it more difficult to generate long-term income, you need to talk to the team at Prime Financial Group.